One of the most maligned ideas in economics is the efficient market hypothesis, perhaps because what is actually a rather technical statement about financial market returns is conflated with some entirely different claim about the superiority of free markets over government dirigisme.
The EMH has various forms, but in brief its message is very simple: an individual investor cannot reliably outperform financial markets. The reasoning is equally simple: money doesn’t get left around on the pavement for very long. If it was obvious that the stock market would rise tomorrow, investors would buy shares immediately and the stock market would rise today instead. Anything that could reasonably be anticipated already has been anticipated, and so markets instead respond only to genuinely unexpected news.
But the EMH has a problem: researchers keep discovering predictable patterns in the data, and such patterns amount to big piles of money being left on the sidewalk.The most famous of these is probably the “January effect”: that returns are particularly high in that month. The January effect was originally explained by investors selling shares in December for tax reasons, depressing prices. Whether or not this is true, the EMH says that other investors should stand ready to buy those cheap shares in December, and the January effect should simply not exist.
Trading Game
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As always. Academia knows the theory of everything but not much about practical reality. The EMH probably explains why there are no rich academics
The thing I find intriguing about EMH is that it is clung to so ferociously as dogma despite the mounting evidence that it is fatally flawed. It is an interesting exercise in watching people defend their world view despite their world view being wrong.